Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

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Tuesday, January 26, 2010

Submarket Dynamics and Innovation: The Case of the U.S. Tire Industry

Posted by D. Daniel Sokol

Guido Buenstorf and Steven Klepper write on Submarket Dynamics and Innovation: The Case of the U.S. Tire Industry.

ABSTRACT: Beginning in 1922, the rate of exit of U.S. tire producers increased sharply and the industry began a severe and protracted shakeout. Just five years earlier, the tire industry experienced a surge in entry that led to a rise of over 80% in the number of producers. We propose an explanation for this episode based on the idea of industry submarkets, which we incorporate in a model of shakeouts. We test this theory and alternative explanations for the surge in entry and exit and the shakeout using a novel data set on patenting in tires and production in the early 1920s of the cord tire, a key innovation we feature in our theory. Our analysis suggests that the development of a new submarket can open up opportunities for entry but also stimulate innovation and in the process reinforce the advantages of the leading incumbents, accentuating the shakeout of producers.

http://lawprofessors.typepad.com/antitrustprof_blog/2010/01/submarket-dynamics-and-innovation-the-case-of-the-us-tire-industry-.html

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